Speaking at the ECB forum with the chiefs of the ECB, the Bank of Japan, and the Bank of England, Jerome Powell noted that two rate increases likely lie ahead this year. Powell did not rule out a rate hike in July.
The euro fell by 0.25% to 1.08845, after falling by 0.45% on Wednesday. The British pound slid by 0.13% to 1.2620, extending its 0.88% loss incurred in the previous session.
The US dollar index gained significantly after two consecutive days of losses amid increased buying power.
As a result, the index recovered some of its recent slide. Now it is heading for the 103.04 mark which may act as a strong obstacle. Crossing this threshold will pave the way for the one-week high at 103.16.
If the asset overcomes this level, the downside momentum may fizzle out for some time.
British pound's future at stake
Traders may have been overly confident in the Bank of England's rigid stance. Andrew Bailey's new comments indicate that financial markets might have been wrong in expecting additional rate hikes amid rapid wage growth and cooling consumer prices.
At the ECB Forum on Central Banking, Bailey noted that the decision made last week to raise the rate by 50 basis points was the most appropriate response to recent economic trends in the country. Further steps are far from obvious.
Meanwhile, market indicators began to suggest expectations of a key rate hike to 6.25% by the end of the year. This is due to the fact that pricing in the service sector led to higher core inflation in the UK for the second month in a row in June.
However, Bailey recalled the specific dynamics of pricing in the energy sector, which had resulted in the delayed transfer of information about a recent decline in wholesale energy prices to consumers.
He also reaffirmed his confidence in the Bank of England's forecast suggesting an upcoming slowdown in inflation in the coming months.
However, he acknowledged the risks associated with an extraordinarily stable labor market, which had significantly contributed to wage growth and, according to some reports, had forced many companies to retain staff even in a period of economic calm.
Commerzbank's British pound outlook
The financial giant forecasts a prolonged and significant drop in the value of the British pound against the euro and the US dollar.
The assessment was made after the recent increase in interest rates by the Bank of England, which did not lead to a currency rise according to Commerzbank. Now the GBP/USD pair is likely to fall below 1.2000.
Analysts from the Frankfurt branch of the bank claim that the Bank of England's indecision over rate hikes raises concerns about its ability to control inflation. Existing trust issues remain a key factor behind their prediction of the pound's drop.
In May, Britain's consumer price inflation unexpectedly remained unchanged at 8.7%. Meanwhile, core inflation rose to 7.1% from 6.8%, indicating persistent price pressure.
Currently, the pound sterling is trying to regain its momentum. However, a greater-than-expected rate hike by the central bank does not support it.
This indicates market uncertainty regarding the Bank of England's further steps. Moreover, the regulator's comments did not include any hints at rate changes.
The fact that the Bank of England constantly focuses on its recent 50-basis-point increase suggests that a similarly strong increase at the next meeting is unlikely.
This uncertainty raises doubts about the central bank's serious intention to fight inflation through active monetary policy measures.
Commerzbank believes that the Bank of England will soon switch from tight measures to interest rate cuts next year. This could put stronger pressure on the pound sterling.
Meanwhile, the ECB will maintain its key rate, demonstrating a relatively more aggressive stance compared to market expectations. This difference in monetary policy will probably contribute to a stronger euro, exacerbating the difficulties the pound will face.
As a result, the EUR/GBP pair is expected to rise to 0.9000 by late September and to 0.9100 by the end of the year. By late 2024, the currency is likely to hit the 0.9300 mark.
The GBP/USD rate is anticipated to be 1.2400 and 1.2000 on the above dates this year. By September 2024 and by the end of 2024, it may weaken to 1.1800 and 1.1600 respectively.
JP Morgan's British pound outlook
The bank is optimistic about the dollar in the second half of the year. It believes that the British pound could become the main victim of the greenback's strengthening. The GBP/USD is likely to see a steady decline, which means that its 2023 rally may be under threat.
JP Morgan's team of economists finds it attractive to hold short positions on high-beta currencies such as the British pound and the New Zealand dollar, while maintaining a negative forecast for the European currency market overall.
However, bets on the pound sterling's decline have become quite costly in recent months as the British currency is currently one of the most profitable financial assets.
Its dynamics do not meet the consensus forecast made at the beginning of the year. The forecast assumed that the GBP/USD pair should have been trading at 1.1900 in June. Strong economic indicators and the Bank of England's decisive policy have become key driving forces behind its growth.
JP Morgan pays particular attention to the dollar, which continues to play a key role in shaping overall currency dynamics.
The bank's experts predict a transition to a new regime in the global currency market, which implies a shift to a more defensive policy, contributing to the dollar's strengthening in the second half of the year.
Current data from China do not match predictions, and the dynamics of European indicators also seem to be slowing.
Core inflation has proven more stable than expected, raising doubts that central banks are ending their rate hike cycles. In fact, they may continue lifting rates, which is reflected in further yield curve inversion.
In the UK, there is a clear inverted yield curve, where short-term bond yields exceed long-term ones. This reflects investor expectations that short-term inflation will remain high before falling again in the coming years.
Such a situation does not favor high-beta currencies and requires attention to the dollar.
According to JP Morgan, the tense situation in the real estate market and persistent inflation will put pressure on the British pound. Therefore, it is necessary to be ready for a decrease in the GBP/USD pair to the 1.1800 mark.
JP Morgan expects the GBP/USD pair to reach 1.1800 by the end of the year. Then it is likely to advance to 1.2100 by the end of March 2024 and to 1.2700 by mid-June.
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